Deficit Defies Dollar Solution A Weaker U.s. Currency Has Yet To Close The Trade Gap

January 25, 1987|By Chicago Tribune

CHICAGO — For more than a year the Reagan administration, along with a number of private labor economists, has clung to the belief that a lower-valued dollar eventually would deliver more domestic jobs as it cut the huge U.S. trade deficit.

But neither the trade outlook nor employment picture has improved despite the dollar's depreciation of close to 40 percent in relation to European and Japanese currencies.

The U.S. trade deficit continues to be a huge problem, running at a $170 billion annual pace, and unemployment stubbornly remains close to 7 percent.

There is hope, however, that the weakened dollar may begin to help employment in 1987.

Gary Burtless, labor economist for the Washington-based Brookings Institute, said that a turnaround in U.S. trade may be in the making.

''The trade picture is one of the few sectors in the economy where one can put one's hope,'' he said.

The idea that a lower dollar might do double duty on the trade and employment fronts was launched by Treasury Secretary James Baker in a September 1985 meeting with world finance ministers in New York's Plaza Hotel. The idea is simplicity itself: Push the value of the dollar lower, as the United States and its major trading partners have been doing since the Plaza agreement, and eventually the United States will export more because its products will be more competitively priced on world markets. Conversely, the United States will import less because foreign goods will cost more in terms of the dollar. Workers, in turn, will be hired to increase production of goods to be exported.

Despite the lower dollar, however, the nation's merchandise trade deficit from July through September swelled to $37.7 billion, the largest quarterly imbalance on record, up 6 percent from the $35.7 billion deficit posted in the second quarter.

In that period imports, led by a surge in automobile purchases from Japan and Korea, increased 2 percent. At the same time U.S. exports, aided by a slight rise in sales of U.S. farm products, gained a meager 0.3 percent.

Moreover, underlining that trend, the Commerce Department reported last month that the November trade deficit had ballooned to a record $19.2 billion. That broke the $16.1 billion record set in July.

Offering greater hope for a turnaround in the trade deficit were October trade figures that showed a lessened deficit led by a 10 percent surge in exports.

''It's gotten so bad that it's bound to get better,'' Brookings' Burtless said.

Sam Nakagama, a New York-based economist with Nakagama & Wallace, said there has been a marked improvement in U.S. exports of chemicals, paper products and pharmaceuticals because of a more favorable exchange rate.

However, Audrey Freedman, a labor economist at the Conference Board in New York, said a recession beginning toward the end of 1987 could blunt the effects of an improving trade position.

Reflecting that less-than-rosy outlook for the economy in 1987, the administration recently reduced its forecast of 4.2 percent growth for the year to a less robust 3.2 percent. Factored into the revision was the expectation of reducing the annual trade deficit by $20 billion to $40 billion.

Economists say that the lack of improvement in the trade balance has come about for a number of reasons. The world economy's growth rate continues to be sluggish, weakening the demand for American exports.

Also, commodity-producing countries and newly industrialized countries along the Pacific Rim, along with Canada and Mexico, have not seen their currencies change significantly in relation the dollar.